Insights & Events

click here to view opinion

On May 11, 2007, the Court of Federal Claims (Loren Smith, Senior Judge) granted summary judgment on both contract liability and damages to 1st Home Liquidating Trust, the successor to 1st Home Federal Savings and Loan Association of the Carolinas (“1st Home”), a thrift that converted from a mutual to a stock association in a 1986 Winstar-related transaction and subsequently liquidated itself in 1993.  The Court held that the government and 1st Home had entered into a Winstar-related contract for the regulatory capital treatment and amortization of goodwill arising from the conversion, that the government had breached the contract, and that 1st Home’s original investors and their legal successors (represented by the Trust) were entitled to money-back restitution of their $32.5 million investment in the conversion.  1st Home Liquidating Trust v. United States, No. 95-250C (May 11, 2007).

In determining that 1st Home and the government (the Federal Home Loan Bank Board (“FHLBB”)) had entered into a contract, the Court found that, in its Application for Conversion and accompanying Business Plan, 1st Home had made an offer to the government to convert from a mutual to a capital stock association in exchange for the right to use purchase method accounting, to amortize supervisory goodwill arising from the transaction over a specified period and to have a 5-year regulatory forbearance in the event it failed to meet its regulatory capital requirements.  The Court concluded that “[t]he factual record of this case indicates an intent to contract with the government for specific treatment [of goodwill], and the conversations, correspondence, and documents confirm that intent.  The Court further held 1) that government documents — including the FHLBB’s Forbearance Letter granting a 3-year forbearance, the FHLBB Resolution authorizing 1st Home to convert from a mutual to a stock association “in accordance with the terms of the application” and an internal FHLBB document acknowledging that the amortization of goodwill was a critical component of the proposed conversion — constituted a government counter-offer to 1st Home’s offer and 2) that 1st Home “unambiguously accepted FHLBB’s counteroffer” by its conduct  in carrying out the conversion as detailed in the Application and Business Plan.

The Court concluded that the government breached the contract following the enactment of FIRREA in 1989.  In so ruling, the Court rejected the government’s argument that 1st Home committed a prior material breach by failing to amortize the goodwill resulting from the conversion on a GAAP-required “level yield” basis, thus negating any liability:  “It appears to the Court that the Government argues on the one hand that the goodwill was so immaterial to the deal that a contract was unnecessary, while on the other, that amortization of the same goodwill over 25 years on a straight-line basis (rather than on a level yield basis over 12 years) constitutes a material breach.  The Court cannot see how the Government can have it both ways.”

The Court also held that the original investors in the conversion transaction had standing to sue, observing that “[t]he government has always known the role that the investors played in the 1st Home conversion since the transaction closed as the investors were named in the transaction documents,” and that “the investors are the real parties in interest with respect to money-back restitution.” 

The Court further held that the breach was substantial, as it deprived 1st Home of the benefit of its bargain.  The Court rejected the government’s argument that plaintiffs were not entitled to restitutionary recovery because FIRREA had little if any effect upon 1st Home’s regulatory capital compliance.  The Court found that because of the breach, 1st Home was required to deduct $17 million immediately from its tangible capital, and that “[b]ut for the breach, 1st Home would have been stronger by $17 million which, at the very least, would have lessened the impact of 1st Home’s loan losses on its capital.”  The Court held that the government had not established any offsetting benefits that plaintiffs had obtained under the contract.  “[I]t is clear that 1st Home did not obtain any benefit from the Government’s contract, as they ultimately bore the entire risk of loss, assumed and paid all outstanding liabilities and liquidated the thrift at no cost to the Government.”  Accordingly, the Court concluded that plaintiffs were entitled to the return of their entire investment of $32.5 million, without offsets.